Hopes are once again rising for trade finance in Myanmar after the country’s central bank issued a notification that all branches of foreign banks now have the right to provide financing and other banking services to local businesses.

This follows an announcement last December that the 13 foreign banks in the country, among them ANZ Bank, Industrial and Commercial Bank of China and MUFG Bank, would be allowed to provide export financing, albeit only to foreign entities and in foreign currencies, and would seem to indicate that the country’s trade finance sector is finally opening up.

Myanmar’s domestic exporters have long been thwarted in their attempts to finance trade. With local banks only able to issue loans against collateral and foreign banks prohibited to lend to them, any trade or project finance by international banks in Myanmar has, to date, been done offshore by opening letters of credit through brokers in offshore centres such as Singapore and Hong Kong.

Upon coming into power in 2016, Aung San Suu Kyi’s National League for Democracy government signalled its enthusiasm to open up Myanmar to the rest of the world, but progress has been painfully slow, and commercial investment in the country’s trade finance market remains stymied by government legislation.

That looked set to change early last year when the Asian Development Bank (ADB) issued its first guarantee in the country. Since then, the central bank has been looking at ways of bringing foreign banks into the domestic sector, with this latest announcement seen as the latest step in the country’s drawn-out process of banking sector reform.

But not everyone is convinced. Eric Rose, partner at Herzfeld Rubin Meyer & Rose, the first American law firm to set up in Myanmar back in 2013 in the hopes of facilitating a foreign investment boom which never came, is sceptical of the impact of the central bank’s statement. “The letter itself is not law, and it contravenes directly the regulations that exist in the country. But this is Myanmar, where the rule of law is not very strong,” he tells GTR.

“Let’s assume for the sake of argument that foreign banks would be allowed to lend to local companies,” he adds. “How would they do that? They are not allowed and they will not be allowed to set up local operations. They are allowed to set up one branch and that branch is very restricted as to what it can do. It cannot open accounts for local businesses. And even if that were the case, the spread is such that I would venture a guess that foreign banks would not be exactly rushing in to finance trade for Myanmar entities.”

A lack of visibility on the creditworthiness of Myanmar’s exporters is also a major barrier to any lending in the country. “While the foreign banks will be the most adept at risking the payment credit of the foreign buyer, there is still the performance risk of the Myanmar exporter,” says Jolyon Ellwood-Russell, partner at Simmons & Simmons.

A credit bureau, established in May this year, may go some way to changing this, but it is not yet operational, and Rose highlights that most businesses in Myanmar are not subject to auditing.

Nonetheless, the announcement by the central bank – regardless of its practical application – is seen as a step in the right direction. “There have been a number of encouraging noises within government around opening up financial services more generally – albeit I would not expect a flood,” says Ellwood-Russell.

Given the difficulties in supporting Myanmar’s exporters directly, Rose believes that with this notification, the central bank is seeking to address capital issues in the domestic banking sector by opening the door to foreign liquidity.

“This letter from the central bank, in my opinion, is set up as a flag for Myanmar banks to let them know that they can now borrow from foreign banking institutions in order to increase their capacity of loaning,” he says.

However, with local banks still operating under onerous regulations – including restrictions on loan tenor – and currency risk from the weak Myanmar kyat making sustaining payments in foreign currency all but impossible, there is still a long way to go before the arcane web of constraints on the country’s banking sector is untangled in order for trade in Asean’s fastest-growing economy to reach its full potential.